The G-20 Summit: Potential Threats to U.S. Interests

The G-20 Summit: Potential Threats to U.S. Interests

Key European leaders have revealed their agenda for the G-20
summit on the global financial crisis. While a few of their
critiques are well-taken, their pre-summit positions raise serious
concerns.

In particular, the "charter of sustainable economic activity,"
trumpeted especially by France and Germany, mixes statements of the
obvious with rhetoric that baldly calls for the U.S. to relinquish
its sovereign authority over economic policy to a global
government. Of immediate concern is the charter's appeal for
global, supranational financial regulation--a clear European power
grab to contain and diminish the role and freedom of the U.S.
financial sector.

The U.S. must reject any proposals at the G-20 summit (to be
held in London on April 2) that would reduce its economic freedom
or restrict its sovereignty. Instead of following these proposals,
the U.S. should lead by pursuing an agenda that rejects
protectionism and any further fiscal stimulus packages or corporate
bailouts and by encouraging international cooperation--on a basis
of national sovereignty--on reforms to the financial sector. These
measures will both mitigate the severity of the current crisis and
reduce the chances that hasty action now will lead to a worse
crisis later.

The Background of the G-20 Summit

The G-20 is composed of 19 nations with leading economies or
ones (such as Saudi Arabia) that are of particular importance for
other reasons. The European Union is the 20th member. The
International Monetary Fund (IMF) and the World Bank are also
represented.

According to British Prime Minister Gordon Brown, the April
summit will address "major questions of economic action" related to
the global financial crisis.[1] The U.S. will attend the summit but has not
announced what it hopes to achieve at it.

Europe's Unacceptable Plans

By contrast, Europe's leaders are well prepared. On February 22,
officials from Britain, France, Germany, Italy, Luxembourg, Spain,
the Netherlands, and the Czech Republic agreed on a seven-point
program, which aims to ensure that all financial market activities
reduce economic "imbalances" and promote market "stability."

The program includes a "charter of sustainable economic
activity" that "would subject all financial market activities
around the globe to regulation, including credit rating agencies."
German Chancellor Angela Merkel said the charter would be "based on
market forces but prevent excess and ultimately lead to the
establishment of a global governance structure." French President
Nicolas Sarkozy, supporting the charter, has stated that "a new
system of regulation without sanctions would not have any meaning."
Other key points in the program include action against so-called
"tax havens" and a strengthening of the IMF and a doubling of its
resources.[2]

The Threats to American Interests

The threat to the U.S. is twofold.

The Threat to the American Economy. First, there is an
economic threat to free markets and financial institutions,
including banks, insurance companies, hedge funds, and private
equity funds. The European program calls for financial market
activities around the world to be regulated to ensure that they
foster "sustainable economic activity," promote economic "balance,"
and do not upset market stability. On a national level, U.S.-style
financial regulations relating to the safety and soundness of
institutions and markets--regulations that ensure the financial
system can properly service the rest of the economy--are
appropriate. But on the supranational level contemplated by the EU,
calls for this kind of regulation raise serious concerns about
economic freedom.

For this reason, there should be significant concerns with
British Chancellor of the Exchequer Alistair Darling's call for the
creation of a "college of supervisors" and European demands for the
establishment of a "global government structure" that will prevent
the development of all market "excess." In light of the ongoing
financial crisis, no country can say that its financial regulatory
structure was up to the task: All have lessons to learn, reforms to
enact. And every country should consider the policies of other
nations as they search for solutions appropriate to their own
circumstances and markets and as they pursue best practices. In
addition, these reforms will be most successful if they present
financial markets with consistent regulatory principles and
approaches across countries. This does not mean, nor require, that
governments give up their regulatory sovereignty to a global
markets regulator.[3]

Likewise, the key leaders of the various monetary and regulatory
authorities ought to meet regularly to exchange observations and
views, and they do so in a multitude of fora. However, empowering a
formal global "college of supervisors" to supersede these many
ongoing discussions makes sense only as a preliminary step toward
granting this college powers over national regulatory systems. Yet
the college itself is more likely to be sclerotic, reacting too
late if at all to the rapid changes of a nimble financial
system.

Nor does it make sense to argue the crisis must be met by
expanding the powers and resources of the IMF.[4] While the IMF, which
had been on a path of contraction to oblivion prior to this
financial crisis, cannot be charged with contributing to the
crisis, it also completely missed the many causes of the crisis.
Nor does the IMF's expertise suggest it has anything material to
add to the resolution of this crisis or the prevention of any
future troubles.

The EU's demand for action against "tax havens" poses another
economic danger. In Europe, "tax haven" is code for any
jurisdiction that has lower taxes than Europe that might lure
Europeans into well-concealed tax evasion. The Brussels solution to
the problem of "tax havens" is to compel these jurisdictions to
report the financial activities of foreign investors investing in
the tax haven country (e.g., Switzerland) and tax harmonization,
which seeks to force low-tax countries to raise their taxes.
Nations have every reason to protect their tax bases and to ensure
their own citizens pay the taxes due. However, Europe's efforts to
force other nations to have as anti-growth, anti-competitive tax
regimes as it imposes on itself is little more than a subtle new
form of protectionism and should be opposed in the United States
and elsewhere.

The Threat to American Sovereignty. Second, and even more
important, is the threat the European proposals imply to American
sovereignty. Taken to its intended conclusion, the European charter
reflects the latest variation on the longstanding European call for
global, supranational financial regulation dominated by Europeans
and backed by a system of inescapable sanctions. The ultimate goal,
according to Chancellor Merkel, is the "establishment of a global
governance structure."[5] Such a structure would transfer Americans'
freedom to regulate their own markets to a global government
entity.

Ever since the Second World War, Europe has worked toward
creating a unified, centralized government of nation states,
similar to but different from the United States. Ever since their
economic model of large social payments, heavy regulation, and
heavy taxation began to stumble in the face of more competitive
economies in the United States, Asia, and elsewhere, the Europeans
have sought to extend Brussels' growing control over Europe to
other countries. In effect, Europe has sought to protect its
struggling economic model by forcing it on others. A global
regulator with a mandate to ensure the stability and balance of the
world economy would be a tremendous step toward this objective.

This is an issue about which all Americans should feel strongly.
The United States was founded upon the inalienable right of
self-government. It is one thing to argue that the U.S. government,
which is ultimately subordinate to the sovereign will of the
people, should follow one policy or another. It is entirely
different to argue that the people themselves should be deprived of
the power to govern their economic life through their elected
representatives and should thereby lose much of their political
freedom. Global economic governance is not simply an economic
fallacy; it is a fundamental assault on the political liberties of
all Americans and on the concept of free and popular government
around the world.

What the G-20 Summit Should Do

The G-20 summit can provide real assistance to the global
economy simply by not doing anything destructive. But it can and
should also take constructive measures.

First, the summit must reject protectionism. Economists and
historians alike agree that the Smoot-Hawley Tariff Act of 1930,
introduced to protect American jobs, played a significant role in
deepening the Great Depression.[6] The 'Buy American' provisions
of the economic stimulus, like Prime Minister Brown's 2007 pledge
of "British jobs for British workers," threaten to start a similar
economically destructive beggar-thy-neighbor trade war.[7] The
summit should not simply proclaim the virtues of free trade; it
should demonstrate it is serious by committing to completing the
soporific Doha Round through the World Trade Organization.

Second, the summit should urge all states to reject further
stimulus packages and corporate bailouts. Here, the U.S. has been
in the wrong, as some European leaders have responsibly pointed
out. As Axel Weber, the president of Germany's Bundesbank, said,
"The expectation that we could neutralize this synchronized
recession through short-term fiscal policy measures is false. We
should not even try."[8] The costs of trying are high: The rising
levels of government debt associated with stimulus packages--and
the much more dangerous, if less immediate, entitlements
crisis--have potentially catastrophic economic consequences.[9]

Similarly, German Chancellor Merkel was correct to remark with
skepticism that "when I look at the restructuring plans of some
American [auto] companies, there are a lot of state funds flowing
into them."[10] Corporate bailouts of industrialized
firms are a disguised form of protectionism and a poor use of tax
revenues. The right course of action is not to bail out failures
but to allow them to go bankrupt and--if they are viable--to be
reorganized through the Chapter 11 process.[11]

Third, the summit should emphasize sensible reforms in the
financial sector. These reforms should not be headline-grabbing
expropriations of national sovereignty, nor should they be hastily
agreed to in detail at the summit. Rather, as Chancellor Darling
has suggested, the summit should commit to the broad goals of
improving the practices of the financial sector by focusing
additional attention on transparency, leverage, and market
operations.[12] To avoid a politicized rush to judgment,
the summit should leave the negotiation of these reforms to the
experts in the respective countries and their legislative and
executive authorities.

Reject Dangerous EU Plans

Early reports suggest the EU's plans for the G-20 summit are
economically dangerous and politically unacceptable. For the sake
of the world's recovery and future prosperity, and its own national
sovereignty, the U.S. must reject these plans completely. The G-20
should find common ground on defending free trade, opposing further
unwise government spending, and reforms to the banking sector that
are designed and implemented to achieve financial, not political,
goals. Any other course of action would be an unacceptable
subversion of America's freedom.

Ted R. Bromund, Ph.D., is Senior Research
Fellow in the Margaret Thatcher Center for Freedom, a division of
the Kathryn and Shelby Cullom Davis Institute for International
Studies, at The Heritage Foundation. J. D. Foster,
Ph.D., is Norman B. Ture Senior Fellow in the Economics of
Fiscal Policy in the Thomas A. Roe Institute for Economic Policy
Studies at the Heritage Foundation.